Tax bonds guarantee to the government payment of owed taxes by a business or individual. These bonds come in many different forms and pertain to different sectors of the economy. For example, alcohol bonds guarantee payment of taxes on alcohol sales while income bonds guarantee payment of deferred income taxes. The amount of risk involved on tax bonds varies on the type of tax, the principal’s character and integrity, and the principal’s financial condition.

Underwriters treat tax bonds with strict due diligence because the obligee is the Federal government. Therefore, only “T-Listed” Sureties may underwrite tax bonds. The term “T-Listed” refers to a Surety included on the U.S. Treasury List Circular 570. Sureties included on this list have demonstrated to the government they have strong finances and an honest reputation. All of the Sureties Offenhartz & Pedersen, LTD. works with currently reside on this list (which you can view by clicking here).

Tax bonds present several potential hazards to Sureties. First, underwriters consider these bonds strict financial guarantees. This means a claim on the bond is inevitable, because the government demands its owed taxes. Second, the bond penalty is usually paid in full. Underwriters refer to this provision of a tax bond as a “forfeiture provision,” because the Surety must “forfeit,” hand over unconditionally, the entire amount of the bond. Third, these bonds lack cancellation provisions, which means the Surety cannot cancel unless they provide a 30 days notice of cancellation to both the IRS and the Principal on the bond.

In the case of deferred income tax bonds – Surety underwriters will almost always require full collateral. In many instances, this makes an income tax bond completely unattractive to a Principal. Many principals on these bonds wonder whether its worth paying the premium and ceding the full amount of the owed taxes when they can just pay the tax directly to the IRS anyway. In many cases, a dispute has arisen between the individual and the IRS. Underwriters must have knowledge of any disputes as well as the individual’s finances.

Other tax bonds – such as those guaranteeing payment of “sin taxes” – have less hazards. Underwriters approve these freely for well financed and trustworthy businesses selling tobacco and alcohol.